The Impact of Corporate Social Responsibility on Investment Recommendations

by Ioannis Ioannou & George Serafeim

Overview — Security analysts are increasingly awarding more favorable ratings to firms with corporate socially responsible (CSR) strategies, according to this paper by Ioannis Ioannou and HBS professor George Serafeim. Their work explores how CSR strategies can affect value creation in public equity markets through analyst recommendations. Key concepts include:

Top executives and managers interested in implementing CSR strategies in their organizations know that negative analysts' reactions, and subsequent value destruction in capital markets is a real possibility when they initially attempt to implement such strategies.

Managers should be aware that not only what is communicated matters but also to whom it is communicated in the investment community. Research analysts differ in their ability to understand the implications of CSR.

Among theoretical contributions, the research integrates diverse theoretical streams and offers the first empirical piece of evidence about how CSR strategies are perceived as value-creating by an important information intermediary: sell-side analysts.

The work also integrates the CSR management literature with a large body of research in accounting and finance, to shed light on aspects of CSR activity for which little is known and much less is being understood; namely, the channels and the mechanisms through which the CSR impact is perceived and realized in public equity markets.

Author Abstract

Using a large sample of publicly traded US firms over 16 years, we investigate the impact of corporate socially responsible (CSR) strategies on security analysts' recommendations. Socially responsible firms receive more favorable recommendations in recent years relative to earlier ones, documenting a changing perception of the value of such strategies by the analysts. Moreover, we find that firms with higher visibility receive more favorable recommendations for their CSR strategies and that analysts with more experience, broader CSR awareness or those with more resources at their disposal, are more likely to perceive the value of CSR strategies more favorably. Our results document how CSR strategies can affect value creation in public equity markets through analyst recommendations.
46 pages